Impact of Foreign Direct Investment on Domestic Innovations In Developing Economies: Moderating Role of Country-Level Governance

Hannarong Shamsub (1)
(1) Executive Office, Thailand Institute of Nuclear Technology, Bangkok, Thailand, Thailand

Abstract

The study aims to explore whether country-level governance moderates the relationship between foreign direct investment (FDI) and innovation in developing economies, extending beyond the typical examination of FDI's direct impact on innovation. Utilizing panel data from the World Bank Development Indicators and Worldwide Governance Indicators databases, covering 55 developing countries over a 25-year period from 1995 to 2019, the study employs a Generalized Method of Moments (GMM) system to estimate the moderating effects of governance on the FDI-innovation relationship. The analysis reveals that three of the six governance variables—political stability, the rule of law, and voice and accountability—significantly moderate the impact of FDI on innovation. Specifically, these governance factors amplify the positive effects of FDI on local innovation, indicating that improvements in governance quality enhance the benefits of FDI for innovation in developing countries. The findings suggest that traditional policy measures, such as increasing government expenditure on R&D and education to boost FDI's innovation spillovers, may be inadequate without concurrent improvements in governance quality. Strengthening governance, particularly in the areas of political stability, the rule of law, and voice and accountability, is crucial for maximizing the innovation benefits of FDI in developing economies. Policymakers in developing countries should prioritize enhancing governance quality to fully leverage the innovation potential of FDI. The study highlights the importance of political stability, the rule of law, and voice and accountability in fostering an environment where FDI can effectively contribute to local innovation. Future research should investigate the potential mediating effects of governance variables to provide a more comprehensive understanding of their role in the FDI-innovation nexus.

Full text article

Generated from XML file

References

Alakbarov, Y. B. (2016). Corruption and Foreign Direct Investments in Emerging Market Economies. ECOFORUM, 5(2): 303-308.

Arrow, K. J. (1962). The Economic Implication of Learning by Doing. Review of Economic Studies, 29:155-173. https://doi.org/10.2307/2295952

Belloc, F. (2012). Corporate Governance and Innovation A Survey. Journal of Economic Surveys, 26(5): 835-864. https://doi.org/10.1111/j.1467-6419.2011.00681.x

Biglaiser, G., & Staats, J. L. (2009). Do Political Institutions Affect Foreign Direct Investment? A Survey of U.S.Corporations in Latin America. Political Research Quarterly, 63(3), 508-522. https://doi.org/10.1177/1065912909331428

Bucar, M., Rojec, M., & Stare, M. (2009). Backward FDI linkages as a channel for transferring technology and building innovation capability: The case of Slovenia. European Journal of Development Research, 21: 137-153. https://doi.org/10.1057/ejdr.2008.11

Cheung, K.-y., & Lin, P. (2004). Spillover effects of FDI on innovation in China: Evidence from the provincial data. China Economic Review, 15: 25-44. https://doi.org/10.1016/S1043-951X(03)00027-0

Damanpour, F. (2009). An Integration of Research Findings of Effects of Firm Size and Market Competition on Product and Process Innovations. British Journal of Management, 21: 996-1010. https://doi.org/10.1111/j.1467-8551.2009.00628.x

Eden, L. (2009). Letter from the Editor-in-Chief: FDI Spillovers and Linkages. Journal of International Business Studies, 40: 1056-1069. https://doi.org/10.1057/jibs.2009.46

Fan, P.-H. J., Wong, T., & Zhang, T. (2007). Politically connected CEOs, corporate governance, and Post-IPO performance of China's newly partially privatized firms. Journal of Financial Economics, 84(2): 330-357. https://doi.org/10.1016/j.jfineco.2006.03.008

Farooque, O. A., & Yarram, S. R. (2010). Corporate governance and foreign direct investment inflows: cross-sectional international evidence. American Journal of Finance and Accounting, 2(1), 1-15. https://doi.org/10.1504/AJFA.2010.034564

Fazio, G. and Chiara Talamo, G.M. (2008), "How “attractive” is good governance for FDI?", Choi, J.J. and Dow, S. (Ed.) Institutional Approach to Global Corporate Governance: Business Systems and Beyond (International Finance Review, Vol. 9), Emerald Group Publishing Limited, Bingley, pp. 33-54. https://doi.org/10.1016/S1569-3767(08)09002-X

García, F., Jin, B. & Salomon, R. (2010). Does inward foreign direct investment improve the innovative performance of local firms? Research Policy, 42(1): .231-244. https://doi.org/10.1016/j.respol.2012.06.005

Griffith, R., Huergo, E., Mairesse, J., & Peters, B. (2006). Innovation and Productivity across Four European Countries. Oxford Review of Economic Policy,22(4): 483-498. https://doi.org/10.1093/oxrep/grj028

Hsu, W. H. L., Wang, G. Y., Tsai, H. L., & Lu, C. W. (2012, April). The moderating and mediating effects of corporate governance on firm performance. In Proceedings of the 11th WSEAS international conference on Applied Computer and Applied Computational Science (pp. 113-119).

Hu, J., Wang, Z., Huang, O., & Zhang, X. (2019). Environmental Regulation Intensity, Foreign Direct Investment, and Green Technology Spillover-An Empirical Study. Sustainability, 11,10:2-15. https://doi.org/10.3390/su11102718

Huang, Q., & Yuan, T. (2021). Does Political Corruption Impede Firm Innovation? Evidence from the United States. Journal of Financial and Quantitative Analysis, 56(1). 213-248. https://doi.org/10.1017/S0022109019000966

Gani, A. (2007). Governance and Foreign Direct Investment Links: Evidence from Panel Data Estimations. Applied Economics Letters, 14: 753-756. https://doi.org/10.1080/13504850600592598

Globerman, S., & Shapiro, D. (2002). Global Foreign Direct Investment Flows The Role of Governance Infrastructure. World Development, 3(11): 1899-1919. https://doi.org/10.1016/S0305-750X(02)00110-9

Javorcik, B. S. (2008). Can Survey Evidence Shed Light on Spillovers from Foreign Direct Investment? The World Bank Research Observer, 23(2): 139-159. https://doi.org/10.1093/wbro/lkn006

Jia, N., Huang, K. G., & Man Zhang, C. (2019). Public governance, corporate governance, and firm innovation: An examination of state-owned enterprises. Academy of Management Journal, 62(1), 220-247.https://doi.org/10.5465/amj.2016.0543

Kaasa, A., Kaldaru, H., & Parts, E. (2007). Social Capital and Institutional Quality as factors of Innovation: Evidence from Europe. Tartu: Tartu University Press. https://doi.org/10.2139/ssrn.1017754

Kettl, Donald. F. (2021) Weberian Bureaucracy and Contemporary Governance. Perspective on Public Management and Governance. 5: 111-120. https://doi.org/10.1093/ppmgov/gvab026

Lall, S. & Narula, R. (2004). Foreign Direct Investment and Its Role in Economic Development: Do We Need a New Agenda? The European Journal of Development Research, 16(3): 447-464. https://doi.org/10.1080/0957881042000266589

Lin, H.-l., & Lin, E. S. (2010). FDI, Trade, and Product Innovation: Theory and Evidence. Southern Economic Journal, 77(2): 434-464. https://doi.org/10.4284/sej.2010.77.2.434

Liu, X., & Zou, H. (2007). The impact of greenfield FDI and mergers and acquisitions on innovation in Chinese high-tech industries. Journal of World Business, 43:352-364. https://doi.org/10.1016/j.jwb.2007.11.004

Law, S. H., & Azman-Saini, W. N. W. (2012). Institutional quality, governance, and financial development. Economics of governance, 13, 217-236. https://doi.org/10.1007/s10101-012-0112-z

Mengistu, A. A. & Adhikary, B. K. (2011). Does good governance matter for FDI inflows? Evidence from Asian Economies. Asia Pacific Business Review, 17(3): 281-299. https://doi.org/10.1080/13602381003755765

Modugu, K. P., & Dempere, J. (2020). Country-level governance quality and stock market performance of GCC countries. Modugu, Kennedy P. and Dempere, Juan M. (2020).“Country-Level Governance Quality and Stock Market Performance of GCC Countries.” Journal of Asian Finance, Economics, and Business, 7(8), 185-195. https://doi.org/10.13106/jafeb.2020.vol7.no8.185

Muhammad, F. (2014). Leadership, Governance and Public Policy Implementation Competencies in the Broader Public Sector. European Journal of Business and Management, 6(36): 66-74.

Mukherjee, A., Wang, Leonard F.S., Tsai, Y. (2011). Governance and Foreign Direct Investment: Is There a Two-Way Relationship? Discussion Research Paper 11/02, University of Nottingham, School of Economics, U.K.

Nadolny, A. J. (2010). Rethinking The "Innovative Firm": Innovation Creation In The Australian Water Technology Industry. Journal of Knowledge Management Practice, 11(1): 1-15.

Newig, J. & Koontz, T. M. (2014). Multi-level Governance, Policy Implementation, and Participation: the EU's Mandated participatory Planning Approach to Implementing Environmental Policy. Journal of European Public Policy, 21(2): 248-267. https://doi.org/10.1080/13501763.2013.834070

North, G. C. (1990). Institutions, Institutional Change, and Economic Performance. New York: Cambridge University Press. https://doi.org/10.1017/CBO9780511808678

Olson, M. L. (1982). The Rise and Decline of Nations: Economic Growth, Stagflation, and Social Rigidities. New Haven: Yale University Press.

Perez-Segura, A. 2014. FDI and Human Development: What is the Roe of Governance?, unpublished Ph.D. Dissertation, Lund University, Sweden.

Phene, A., & Almeida, P. (2008). Innovation in Multinational Subsidiaries: The Role of Knowledge Assimilation and Subsidiary Capabilities. Journal of International Business Studies, 39, 901-919. https://doi.org/10.1057/palgrave.jibs.8400383

Saggi, K. (2002). Trade, Foreign Direct Investment, and International Technology Transfer: A Survey. The World Bank Research Observer, 17(2): 191-235. https://doi.org/10.1093/wbro/17.2.191

Schrumpeter, J.A. (1970). Capitalism, Socialism, and Democracy. London: Irwin University Books.

Sin, C-Y. & Leung, W. (2001). Impact of FDI Liberalization on Investment Inflows. Applied Economics Letters, 8: 253-56. https://doi.org/10.1080/135048501750104015

Shamsub, H. (2014). Interrelationships between Inward FDI and Indigenous Innovation in Developing Economies, Global Business and Economic Review, 16(3): 296-309. https://doi.org/10.1504/GBER.2014.063074

Tang, Y., Shapiro, D., Wang, M., & Zhang, W. (2015). The Effects of Corporate Governance on the Innovation Performance of Chinese SMEs. Journal of Chinese Economic and Business Studies, 13(4): 311-335. https://doi.org/10.1080/14765284.2015.1090267

UNESCAP. (2020). What is Good Governance? https://www.unescap.org/sites/default/files/good-governance.pdf. Accessed 4 January 2020.

Vedantham, V. Mallika & Kamruddin, S. (2015). Good Governance and Public Policy in India, International Journal of Social Sciences, Special Issue, 1(1): 787-889. https://doi.org/10.20319/pijss.2015.s11.878889

Weber, M. (1968). Economy and Society. New York, NY: Bedminster.

World Bank. (2015). World Development Indicators. http://data.worldbank.org/data-catalog/world-development-indicators. Accessed 0 January 2020.

World Bank (2015). Worldwide Governance Indicators. http://info.worldbank.org/governance/wgi/sc_country.asp. Accessed 2 January 2020.

Wu, Chiu-Hui. (2021). On the Moderating Effects of Country Governance on the Relationships between Corporate Governance and Firm Performance. Journal of Risk and Financial Management 14: 140. https://doi.org/10.3390/jrfm14030140

Zeneli, V. (2014). The Role of Institutions and Good Governance for Attracting Foreign Investments: Evidence from Southeast Europe. Business and Economics Journal, 5(2): 1-20. https://doi.org/10.4172/2151-6219.100092

Authors

Hannarong Shamsub
hannarong.shamsub@gmail.com (Primary Contact)
Shamsub, H. (2023). Impact of Foreign Direct Investment on Domestic Innovations In Developing Economies: Moderating Role of Country-Level Governance. Innovation Journal of Social Sciences and Economic Review, 5(1), 1–10. https://doi.org/10.36923/ijsser.v5i1.179

Article Details

Smart Citations via scite_
Views
  • Abstract 72743
  • Download PDF 293